Global Agenda: Unfinished business

There is a widespread feeling that, comeSeptember, global equity markets will sell off. That is not necessarilya bad thing, because even bullish analysts accept that the markets havegenerally come too far, too fast, and need to cool off. A drop of 10percent, or even 20%, after the tremendous surge that has taken placesince March, will, in this view, provide the necessary and overdue"correction," after which a more measured advance may resume.

Septemberis the ideal time for any such sell-off to take place, because - forreasons that no one has ever convincingly explained (althoughinnumerable hypotheses exist) - it has by far the worst historicalrecord of any month for equity markets. It would therefore not be atall surprising if we were to see prices falling next week and/or nextmonth, even as the news background continues to be generally positive,as it has recently been.

In other words, from a "big picture" perspective that considersthe state and prospects of the broader economy, whether at thenational, regional or global level, it is of little consequence ifshare markets fall back now. What really matters is whether the keyassumptions underpinning the bullish view - namely, that the recessionis over, with growth set to resume shortly (or already under way), andthat the massive stimulus measures undertaken during the crisis can beunwound gradually - are valid.

If they are, then the conclusion drawn by many people duringthe crisis months, that the economic paradigm of recent decades isirretrievably broken, will be proven wrong. Horrendous though it was,the crisis proved manageable. Things, perhaps many things, requirerepair and reform, but the consumer-driven economy has survived andwill rise anew.

This is the essence of the bullish case, and thereason why so many people - especially noneconomists - find itdifficult to swallow. They were told by all the great and the good thatthis was the most severe economic crisis since the Great Depression ofthe 1930s. Yet they are now being asked to believe that "the GreatRecession," as the slump of 2008-09 is now being widely labeled, iseffectively over after only 18 months, of which some six to nine monthssaw intense declines in all economic parameters.

They find that hard to square with the "worst since the 1930s"story, and - more relevantly to their own lives - hard to square withthe weakness in labor markets (everywhere), housing markets (in thebadly hit countries and states in the US) and capital markets (whererecovery has been partial and patchy). At the end of the day, theydon't believe what they are being told.

The issue of belief, aka confidence, has been aprominent theme in this column for a long time, and it is likely toremain so. People don't believe their leaders - even Obamania isfading, let alone "leaders" like Gordon Brown - and they certainlydon't believe the bankers, whether central, commercial or investment,who concocted the poisonous stew and yet continue to do very nicely,thank you. Because of this loss of trust, lack of confidence and fearof being taken advantage of, people are no longer ready to spend andconsume as they did in the past.

That is enough to destroy the old paradigm, because it wasbuilt on credit - and credit demands confidence, credibility and evencredulity. The world is engaged in what the economists call"deleveraging," which simply mans using less credit. The supposed"solution" to the crisis has been to socialize private debt (i.e.transfer existing debt from the private sector to the public) and toprovide money to the general public (borrowed from the same generalpublic's later years or offspring) to facilitate further spending inthe here and now.

Alan Abelson, the veteran Barron's columnist,perceptively noted that most of the massive stimulus programs rolledout around the world are variations on the "Cash for Clunkers" approachused in Germany, America and elsewhere to persuade people to buy newcars and thereby keep the auto industry's production lines ticking.Bring in your old corporate bonds, your crumbling infrastructure andyour unpayable mortgages and bank loans and we will give you money orloans backed by the government. Your part of the deal is to go andspend the money.

But people are reneging on their part of the bargain. There has been asharpswing away from excess spending and back to saving and paying downdebt. If this behavior carries on, the stimulus strategy will fail andthe economy will enter the second leg of the "GreatWhatever-this-turns-out-to-be."

But coming after the hopes raised by Obama's election and theapparent recovery of the last six months, the next downswing will becharacterized not just by shock but by disappointment. We have seenhope morph quickly into baseless euphoria, and we can really do withoutdisappointment mutating into despair.